LEGAL CORNER: Interest rates and income: Your options

United Kingdom base interest rate remains at an historic low of 0.5 per cent, where it has been for more than five years now.

It is likely that the rate will rise only slowly, as although economic conditions in the United Kingdom have now recovered somewhat – indeed they are stronger than most of Europe with the possible exclusion of Germany, average earnings have risen hardly at all, especially in the public sector.

With many households still unable to comfortably meet monthly mortgage repayments, any increase in base interest rates could therefore be the final straw, a fact which the present government is not unaware of as we move towards a general election next year.

So where can a reasonable income be obtained?

Cash

At the present time investing in cash deposits will produce a gross interest rate of often under 1 per cent where there is no fixed term or the notice period for withdrawal is short.

Fixed-term investing on the other hand for perhaps a year of two years will produce a gross rate of approximately two per cent and for longer fixed terms this can rise to three per cent or slightly higher.

This type of investing is classed as low-risk because the capital invested is secure, as long as the institution itself is secure and not more than £85,000 is invested in any particular institution.

It is also now possible to invest £15,000 in a cash ISA, within which interest is paid tax-free.

Risk

It has been a curious development over the past five years that areas of investing such as the stock market, offer on average a better income return than cash investing and the current income yield on the FT100 is about 3.5 per cent.

Of course there are greater risks but if investing is for a period of investing of over five years, these risks can be managed within an agreed investment strategy.

Investing in stock markets can never be classed as low-risk, however, and suitable advice and safeguards should always be obtained.

It is therefore a question of examining one’s own financial and personal requirements and first reserving funds to provide for financial commitments which are mandatory and remain constant.

Thereafter, a decision can be taken on what can be invested over the medium term to produce the kind of return mentioned above, taking into account individual attitude to investment risk.

This is not an exact science and requires discussion with each client.